FX Weekly: All Eyes On The Fed

Macro News

Global: To the exception of the oil move we saw this weekend following Saturday’s attack on the ‘world’s most important oil processing plant,’ which pushed front-month futures on Brent and WTI up by 20%, the other spectacular move was the consolidation on global yields and especially on the US Treasuries. As we mentioned earlier this month, we thought that US yields had plunged too much (and too fast) relative to other major economies and we would expect a short-term consolidation on the US 10Y. We thought that the trade on US bonds was very crowded and that the recovery in fundamentals coupled with an ease in uncertainty would push away investors from safe havens. Figure 1 (left frame) shows the recovery in the Citi economic surprise index, which has been soaring since the beginning of July surpassing the zero-line in the past few days.

This month was also marked by a spectacular rise in global equities, with most of the developed markets up between 5 and 10 percent in the past two weeks. For instance, Japanese stocks (TOPIX) are up 8 percent this month in this risk-on market, also helped by the little depreciation in the Japanese yen. All eyes on the Fed meeting this week as investors are waiting for US policymakers’ answer to the ECB’s announcement.

Euro: As expected, the ECB reduced its growth and inflation forecasts for the year 2019 and 2020 as the risk remains elevated in this current environment amid the persistence of global uncertainty impacting the international trade growth and the vulnerabilities in some EM markets due to the high US dollar. As a result, the Governing Council decided to cut its deposit rate by 10bps to -0.5% and restart its asset-purchase program in November; the central bank will buy EUR 20bn of bonds – sovereign and corporate – as long as the economy needs. One interesting intake from the ECB conference was Draghi’s comments on governments’ spending; in short, he argues that monetary policy in this current climate would work even better in the presence of fiscal stimulus in order to anchor inflation expectations back around 2 percent. We will see now how European governments will react to that call in the medium term.

UK: The Bank of England also meets this week, but we do not expect any rate cut nor QE announcement (Official Bank rate is currently at 0.75%). The British pound got strong support this month, supported by a risk-on environment and hopes that a no-deal Brexit will be avoided.

Figure 1

Source: Eikon Reuters

US Treasuries Net Specs

Net speculative shorts surprisingly fell by 146K contracts in the week ending September 10 despite the sharp consolidation in US yields. Net shorts are down almost 300K contracts in the past month, mainly coming from the reduction in 2Y shorts (182K) and 10Y shorts (114K).

Figure 2

Source: CFTC

FX Positioning

EURUSD: The euro got strong support below 1.10 during the ECB conference last Thursday but failed to break its short-term resistance at 1.1125 (50D SMA). We are still long EURUSD ahead of the Fed’s meeting on Wednesday as we are curious to see US policymakers’ response to Draghi’s comments. Two levels to watch on the upside: 1.1125 and 1.1185 (61.8% Fibo retracement of the 1.0330–1.2550 range).

Figure 3

Source: Eikon Reuters

GBPUSD: Cable experienced a significant rally this month, strongly supported by the risk-on environment. After raising by 500 pips, the pair did not manage to break through 1.25 (which also represents its 100D SMA). We took profit on our long position as we do not want to be heavily short US dollar this week.

EURGBP: The pair continued its bear consolidation after it hit its long-term support at 0.93 in the middle of August. It broke its first support at 0.8920 last week, which represents the 38.2% Fibo retracement of the 0.8310–0.93 range and the 100 SMA. Next support on the downside stands at 0.8840 (200D SMA).

Figure 4

Source: Eikon Reuters

USDJPY: The yen has also been weakening significantly in September against all major currencies, levitating Japanese and global equities. USDJPY is up 3 figures in the past 3 weeks but did not manage to break through the 108 resistance (100D SMA) as traders take profit ahead of the Fed meeting. We will closely watch the 109.15–109.40 resistance zone in the short run (200D SMA and 50% Fibo).

Figure 5

Source: Eikon Reuters

USDCHF: The pair has been fairly quiet in the past few weeks, with the Swiss franc gradually weakening against the greenback. There is no particular trend for the moment; next resistance on the topside stands at 0.9950 (200D SMA).

Chart of the Week

For many years, investors have been speculating on the burst of the Australian housing market, which would plunge the economy into a recession for the first time in nearly 30 years. With a median house-price-to-income ratio close to 12.5, properties in the main cities such as Sydney and Melbourne are among the most expensive in the world. Hence, the increase in the volume of supply coupled with the significant slowdown in foreign investor demand have been weighing on Australian properties in the past 18 months; prices in the main 8 cities are down 7.7% YoY.

This chart shows an interesting co-movement between Australia house prices and China credit impulse (TSF: Total Social Financing, 6M Lead). In the past 15 years, it seems that each time we saw a rebound in China credit, it has usually been followed by a recovery in property prices in the Antipodes within the next 6 to 9 months. Will the little pick-up in the annual growth of TSF be enough to halt the drawdown in Australian house prices?

Figure 6

Source: Eikon Reuters, RR

Disclosure:I am/we are long EURUSD.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.